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Chinese Yuan is enjoying best week since 2005 as traders gave up bets over aggressive weakening of Yuan amid slowdown in China. Yuan has appreciated close to 1.12% since Monday, after FOMC minutes turned out to be more dovish than expected. Yuan traded as low as 6.18 against dollar but gave up some gains today closing at 6.20.
Background -
- China has been moving for greater Yuan flexibility and less intervention in the currency market. Traders started betting heavily against sharp fall in Yuan as Peoples Bank of China (PBOC) flexed daily movement range by 2%.
- Chinese debt remains close to 250%of GDP and slowdown in growth is expected to hurt the economy hard. Recent data points that China might not reach this year's targeted 7% growth decided by policymakers.
- However since November 2014, Yuan depreciated from 6.12 to 6.27 by February 2015. Yuan registered its first yearly depreciation last year in at least a decade.
Key notes -
- Betting against heavy depreciation is not easy as the country hold's world's largest Forex reserve close to $ 4 trillion.
- However Yuan bulls should rejoice in caution as current move from 6.12 to 6.27 and then again to 6.18 shows that volatility is on the rise. Chinese officials may not mind stable depreciation as it would help the exports.
- Rapid unwinding of carry trade may see moderation as ultra-loose monetary policy by ECB seeing conversion to Eurobonds from dollar. However the carry still remains a concern and rapid unwinding may hit Yuan once the monetary policies turn corner.
